Down Down Property Prices Are Down (February 2019)

Down down prices are down in the property
market in Australia. Thousands of houses that should have sold
last year are still unsold in early 2019. Just looking at the local real estate market
here in Queensland, I can see that there are so many more houses on the market with lower
prices than last year. Makes sense, right? Supply and demand. The official figures for 2018 are as follows. Sydney home prices dropped 8.9%. Melbourne prices dropped 7%. Perth dropped 4.7%. Darwin dropped 1.5%. Brisbane and Adelaide remained fairly steady
and gained 0.2% and 1.3% respectively. Canberra prices increased 3.3%, with Hobart
being the only capital with significant gains of 8.7%. As a nation, including regional centres, Australian
house prices fell 4.8% in 2018. Hobart and Darwin actually have less homes
on the market than they did last year, so that might be a sign that their markets might
rise. However, all other capital cities are in a
bit of a housing glut. Perth has 6% more houses for sale than this
time last year. Brisbane has 8% more. Sydney 22%. Canberra 25%. While Melbourne has a staggering 42% more
homes for sale than it did in January 2018! Surely this is a sign. Investors are starting to want out. A new term, FONGO, is being bandied about,
which stands for Fear Of Not Getting Out. It’s the phenomenon where homeowners wishing
to sell start to get anxious when they can’t. They worry that this time next year, prices
will be even lower, so they tend to lower their asking prices to try to get out sooner
rather than later. This is the normal consequence of a falling
market. The RBA, the Reserve Bank of Australia, are
playing it cool, seemingly. On Tuesday 5 February 2019, they kept the
cash rate at a record low of 1.5%. RBA Governor Philip Lowe said, “The housing
markets in Sydney and Melbourne are going through a period of adjustment, after an earlier
large run-up in prices”. He’s certainly not pushing the panic button
yet, or at least, he doesn’t want to seem like he’s reaching for it under the table. The Commonwealth Bank, Australia’s largest
home loan lender, thinks the downturn in property prices will be larger than they first thought. Like other forecasters, they believe that
the heaviest falls will be seen in Sydney and Melbourne. They noted that their forecasts had been revised
downwards due to the falling sentiment of buyers from an asset price perspective. In other words, buyers don’t want to buy
property if they think that the market is falling. And that’s exactly what markets are based
on — people’s perceptions. Westpac Bank’s Consumer Sentiment Survey
from January 2019, also paints a fairly gloomy picture. The results showed that views on the outlook
for home prices were the most pessimistic since they started asking the question back
in 2009. What happens when buyers think that the market
is falling? They hold off buying hoping for even cheaper
prices in the future. The Commonwealth Bank predict that Sydney
property prices will fall by a further 4.7% this year, and predict that Melbourne prices
will fall by about 5.9%. A change in government policy could result
in a change to taxation rates around housing, which would result in even further falls. The Australian Labor party’s policies on
negative gearing and capital gains are examples of this. Regarding negative gearing, property investors
can currently claim losses on their investments as tax deductions. Labor wants this concession to be removed
from future investments but only on existing housing. Newly built houses would still enjoy the concession
to encourage housing construction. And regarding capital gains, Australians who
own property for at least 12 months then sell it for a profit are currently entitled to
a 50% discount on the tax this profit attracts. Labor wants this reduced to 25% for future
investments. Migration intake is also a factor. Higher immigration results in more people
looking for houses in a smaller and smaller pool, resulting in higher house prices and
rent. This is especially true when there are constraints
on building enough new homes. Less immigration results in the opposite — further
price falls. The recent increase in immigration coincides
with Australia’s most recent housing price boom. Sydney and Melbourne are taking more migrants
than ever. Australian house prices have increased 50%
in the past five years. Sydney has increased at a whopping 70%! Ultimately, government have the power to influence
house prices through policy. It’s just a matter of who do they wish to
piss off? The investors and landlords, or the struggling
renters desperately trying to buy into an over-inflated market. If the government’s goal is to benefit the
most people, then surely they must implement policy that brings about a steady decline
in property prices. Expensive housing really only benefits the
minority of Australians. If you own your home and plan to continue
living in it, its price doesn’t really affect you all that much. If you’re locked out of the property market,
then the reasons for hoping for a market fall are obvious. However, the Australian government and the
banks don’t want to see a decline in house prices. Governments benefit from a rising and stable
real estate market. Both federal and state governments can generate
more fees and taxes from higher land prices, allowing more money to flow through to governments. In isolation, falling house prices do not
necessarily mean people start having less money to spend. However, falling house prices may be a result
of rising mortgage costs. In that case, as house prices go down, people’s
disposable income decreases resulting in a slowdown in the economy. As ABC’s Business Editor, Ian Verrender,
wrote: “When the value of your major asset is going
backwards, you’re less inclined to spend and less likely to be given credit. That, in turn, weakens the domestic economy
which eventually leads to higher unemployment, mortgage defaults and, potentially, a banking
crisis.” Household debt has also become an issue. Higher debt means less disposable income meaning
lower consumption. ABC’s Ian Verrender, stated: “Having splurged so much on homes, our household
debt, at just shy of 200 per cent of annual income, ranks among the world’s highest. Hocked to the eyeballs, it’s no wonder our
household consumption is sluggish, retail sales are struggling and inflation is anaemic.” But the biggest single threat to the Australian
economy, according to the RBA Governor Philip Lowe, is the threat of a hard landing for
China’s economy. He stated: “If we are to have a significant downturn
in the economy I think the catalyst would be something going wrong in the global economy. So that would be number one, and China would
be at the top of that list. If the Chinese economy stumbled and the authorities
didn’t manage the tightening up in credit well and the Chinese economy slowed, then
that would hurt us a lot. Of the domestic sources of risk the housing
market-consumption nexus is the most prominent one, but not more prominent than the overseas
risks.” And lastly, the Danish investment bank, Saxo
Bank, have outlined in their words, an “outrageous forecast that could happen if certain factors
were to fall into line”. Saxo Bank market strategist Eleanor Creagh
stated: “The ‘Australian Dream’ was financed
through an epic accumulation of debt as interest rates collapsed, with household debt standing
at 189 per cent of disposable income. The Great Financial Crisis was responsible
for deflating housing bubbles in other advanced economies, but not in Australia. In a bid to stave off the crisis’ effects,
Canberra’s ‘economic security package’ further fuelled the spectacular run-up in
leverage, kicking the proverbial can down the road. In 2019, the curtains close on Australia’s
property binge in a catastrophic shutdown driven most prominently by plummeting credit
growth. In the aftermath of the Royal Commission,
all that is left of the banks is a frozen lending business and an overleveraged, overvalued
mortgage-backed property ledger and banks are forced to further tighten the screws on
lending. The confluence of dramatic restrictions in
credit growth, oversupply, government filibusters and a slowdown in global growth cement the
doom loop; property prices crashing by 50 per cent. Australia falls into recession for the first
time in 27 years as the plunge in property prices destroys household wealth and consumer
spending.” So what are your thoughts? Is Australia headed towards a property price
crash, or are prices just going to steadily decline throughout 2019 and pick up again
in 2020? Unfortunately, none of us know. There are so many issues at play. A Chinese debt bomb. Dangerously high Australian household debt. An economy so dependent on foreign nations
that we simply don’t know what will spark the next recession. House prices? Economy? Recession? It’s going to be a wild ride!

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